I’m not officially a member of any real estate investor clubs in Chicago, but I get asked to speak to them from time-to-time. Last month, I decided to take one of the local groups up on their offer. They wanted a seasoned investor, like me, to advise on how to find that perfect diamond in the rough that could all but guarantee a solid ROI. Well, I took the opportunity to remind them that there are never any guarantees in this business. There are inherent risks to residential property investment, particularly if you take on the renovation of an older home. And, in this town, we’ve got plenty of them. Being on the lookout for common rehab issues, however, will help you determine if a project is worth tackling. In the end, though, the key is to be able to weigh the total cost of the renovation against the after-repair value. And, I’ll tell you one of the best ways to do just that with Chicago real estate deals.
Evaluating Real Estate Deals in Chicago
It’s too easy these days to fall for the idea that finding distressed or older properties that can be flipped for big profits is the norm. This misconception is especially strong among new house flippers in Chicago, in part, because of the growing popularity of real estate investing shows on TV. But, the reality is that there are real issues you should be on the lookout for when you find a fixer-upper home for sale that could drive your potential returns into the ground if you’re caught unaware. To help with this, I’ve compiled a list of what some of those issues are and suggest how you can accurately calculate your costs to rehab. You won’t have to attend a meeting of any kind to get them either. Here they are:
- Foundation issues. Older homes naturally settle over time, but settling can lead to foundation issues or indicate the presence of an existing one. Repairing or replacing a home’s foundation can cost thousands of dollars, but that might not be the only cost you’ll incur. Cracked and damaged foundations let water seep in, bend and break pipes, and, in Cook County, leak potentially high radon levels into the house. Before you know it, a $5,000 repair bill can jump to tens of thousands of dollars or more. Telltale signs of settling, and possible foundation issues, are sinking floors, uneven steps, doors that won’t close, and cracks wider than ¼ inch.
- Plumbing problems. Some of Chicago’s oldest homes, like the worker cottages constructed both before and after the Chicago fire of 1871, may need new plumbing. If the home still has lead pipes, these should be replaced immediately. Though lead pipes were designed to have a long life expectancy, they leach poisonous lead into the household water. You can tell if a plumbing pipe is lead because it is a matte gray color and, if you scrape it with a screwdriver, you’ll see it become shiny. What you’re more likely to encounter are galvanized steel pipes, which showed up around the 1930’s, or a mix of galvanized steel and copper if previous repairs were piecemealed together. Unfortunately, galvanized steel rusts over time, clogs the lines, and reduces water pressure. And, older copper lines can have lead-based solder at the joints. It’s expensive to upgrade the plumbing to new copper lines, PVC pipe, or PEX pipe—especially if you have to replumb the whole house—but, it can be dangerous not to if the materials leak, burst, or cause health problems. Test the water pressure around the house for signs of problems and hire an expert to investigate if the pressure is low.
- Water damage. Foundation issues, plumbing problems, and Chicago’s wet winters can lead to water damage, which can, in turn, tack on thousands of more dollars in repair costs. Whether stormwater has seeped in through a crack in the foundation or an old pipe has ruptured, the mere presence of moisture encourages the growth of mildew and mold, harmful bacteria, and termites. You’ll pay a pretty penny to remediate these issues too, but the health of the house—and its future occupants’—requires it before you can even begin other aspects of the rehab. And, if you’re working within a strict renovation timeline, like those imposed on the purchase of Chicago city-owned properties, it might be hard to stay on time and within budget. So, don’t dismiss signs of wall discoloration, musty smells, pooling water, dampness and cold temperatures, even creaking floors.
- Outdated electrical systems. Electrical systems installed in older homes, like some of Chicago’s old greystones and two-flats, aren’t equipped to handle the load needed to power today’s electronics—and, they may not be safe either. If they fail, they can damage electronics or start a fire, resulting in property loss, injury, even death. Unfortunately, replacing knob-and-tube wiring, which was commonly used in homes through the 1930’s, can cost upwards of $15,000 or more, depending on factors such as the size of the house and how easily the wiring can be accessed. But, it’s possible you’ll also have to replace an old fuse box or outdated circuit breaker, branch circuits without ground conductors, outlets and switches, and the main line from the meter to the panel. As a part of the initial home inspection, get a licensed and experienced electrician to give the electrical system a very good once-over.
- Asbestos. When airborne, asbestos is a serious health risk and all renovations on older, rundown homes should be carried out with this in mind. Airborne asbestos may already be present inside some of Chicago’s distressed properties for sale if repairs weren’t carefully carried out over the years. And, any new rehab could dislodge the material into the air if it’s not properly contained. Because its use wasn’t regulated until the 1970’s, asbestos can be found in cement sheets, roofing and siding, insulation, boilers, furnaces and furnace ducts, and many decorative elements around the home. It can be costly to contain, and especially to remove, but because it’s known to cause cancer, every effort should be made to keep the home clean. It’s also important to note that, before you even begin the rehab, you may have to contact the Illinois Environmental Protection Agency to get the go-ahead.
Whether you encounter these particular issues in a home or not, it’s critical that you evaluate the cost to rehab and estimate your ROI before you buy an investment property. Since Chicago’s real estate investment market is competitive, you’ve got to do this quickly and easily before anyone else swoops in and steals the deal. In my experience, there’s only one valuation tool that’ll help you quickly discover whether the deal is a keeper. Take it from me, it’s worth your time to look into.
Unearth Good Deals with Only the Best Tools
I’ve been investing in Chicago real estate for a very long time and I’ve made a good business out of flipping houses. But, in the early days, I made a critical error when I bought an old home in Galewood that turned into a major fixer that I wasn’t prepared for. Even though I’d performed a home inspection, I got the numbers wrong. I underestimated my repair costs and overestimated my returns. I abandoned ship—at a pretty big loss—and almost quit my investing career.
Then, I became an independently owned and operated HomeVestors® franchisee. As a part of my training, I was taught what to look for, and what to look out for, when evaluating deals. I also gained access to HomeVestors®’ proprietary valuation tool, ValueChek™, which helps me accurately run the numbers on my potential investments. Now, I calculate regionally-adjusted repair costs and estimate my potential ROI in a matter of minutes. I can even do it from my phone. It doesn’t get any quicker or easier than that to find a real diamond in the rough that’s got a lot of potential to shine.
If you need a better way to evaluate Chicago real estate deals, call HomeVestors today to see how you can get access to tools like ValueChek too!
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